Response to Classmates Discussions
kingstonman41
BUS592Week6-DiscussionForum2.docxBUS 592 Week 6 - Discussion Forum 2
Guided Response: Review the posts from your classmates and respond to at least two. Compare and contrast the points you and your classmates made regarding risk factors in acquisitions. Each response should have a minimum of 100 words.
Lisa James
MondayMay 11 at 6:29pm
Describe the concept of risk as it pertains to investment decisions.
Block, Hirt, and Danielson (2019) state that in regard to investment decisions, risk can be defined as “ the potential variability of the outcomes from an investment” (pg. 434). This means that if an investor is less likely to predict what will happen with an investment, such as the rate of return, the more risk is seen to be involved with the investment decision. Because investment decisions involve significant amounts of money, most investors tend to shy away from super-risky investments.
Explain how companies measure the level of risk related to a given investment decision.
One may a company can assess risk is to calculate the expected value and standard deviation. In order to calculate the expected value, one must take the weighted average of the outcomes and multiply that times their probabilities (Block, Hirt, & Danielson, 2019). By calculating the standard deviation, an investor can see how the outcomes fall from the expected value. The third calculation is the coefficient of variation which divides the standard deviation of an investment by the expected value. The larger this number is, the more of a risk can be expected (Block, Hirt, & Danielson, 2019). Portfolios of common stock usually utilize beta which measures the volatility of return on an individual stock against the stock market index of returns. Additionally, they can also utilize simulation techniques in order to look at possible outcomes, as well as a decision tree to look at all variables that must be considered. All of these measures can be utilized to not only determine the amount of risk but also in regard to a specific type of investment.
Discuss risk factors companies should consider with acquisitions.
According to Allocca, one of the top risk factors to be considered is the integration of the two companies (Allocca, 2016). This is risky because a lot of focus is put on allocating funds to secure the deal, but then the merger is poorly done and costs additional unforeseen funds, or even overpaying in the beginning. Additionally, when acquiring a company or the assets of one, it is important to understand the obligations of the firm. The amount of debt being acquired is important to understand, as some additional debt was probably already taken on to have the capital for the acquisition. Lastly, another major investment during an acquisition is IT integrations. This can be a huge expense and many times can cost almost as much as the cost of the acquisition.
Explain which of these risk factors you see at play in the Deere & Company acquisition.
Prior to the deal, John Deere did not manufacture any equipment for road building and paving (Grayson, 2017). In order to have somewhat of a monopoly over the construction industry, they could have jumped into a deal that is not as favorable as it could be. Wirtgen’s sales are about $3 billion, which while significant, is small when considering John Deere’s global presence. Additionally, Wirtgen is a well-established company, established in 1961. John Deere will have to be very strategic with the corporate integration and needs to take into consideration certain unforeseen investments such as IT and benefits.
Resource
Allocca, S. (2016, December 20). Here are the top 15 risk factors of mergers and acquisitions. Retrieved May 11, 2020, from https://www.cfo.com/ma/2016/12/top-15-risk-factors-ma/
Block, S. B., Hirt, G. A., & Danielson, B. R. (2019). Foundations of financial management (17th ed.). Retrieved from https://www.vitalsource.com/
Grayson, W. (2017, December 1). Deere completes acquisition of Wirtgen Group. Retrieved May 11, 2020, from https://www.equipmentworld.com/deere-completes-acquisition-of-wirtgen-group/
Kyle Jablonski
MondayMay 11 at 9:46pm
With John Deere’s investment of Wirtgen Group, consideration of risk should be assessed. With variable investments, there isn’t any way of getting around the potential for that investment to be a bust. It pertains to their investment decision to ensure, financially the company can financially take on that risk. Also the length of time for that risk to potentially show a profit from the investment.
The first thing that should be looked into is the actual risk the company is investing in are metrics such as Total liabilities, total earnings, total overhead, and other metrics found on their balance sheets. From these metrics, ratios can then be calculated and measured against competitors and the purchasing company's tolerance for their ratios. Also, the expected profitability is another factor that should be considered as well to ensure the “Risk is worth the reward.”
A large factor that may not necessarily show up on a company's balance sheet is market trends. Being able to identify upwards or downward market trends could help promote or defer a company from purchasing another. A past example of when market trends went down and a company bought them was Viacom’s 2010 purchase of Blockbuster. Today Blockbuster only has one store and physical copies of visual media being a thing of the past. That is something that is not going to show up on a balance sheet no matter how hard one studies it.
I see John Deere wanting to know all of the factors. The reason being is to build an entire story of Wirtgen Group. A complete look at John Deere’s own portfolio in order to assess if they are able to take on the risk. Looking at the different ratios and comparing the ratios to the competitors and to their own tolerances. Lastly, a qualitative outlook of market trends, past, and future outlooks of the company are all very important.
References:
Block, S. B., Hirt, G. A., & Danielson, B. R. (2019). Foundations of financial management (17th ed.). Retrieved from https://www.vitalsource.com/ (Links to an external site.)
